USD/JPY

Bank of Japan Governor Haruhiko Kuroda ruled out the chance of additional monetary easing, even after heightening overseas risks forced the central bank to temper its optimism that robust exports and factory output will support growth.

Kuroda also brushed aside growing calls from politicians and bank executives to raise interest rates or water down the BOJ's 2% inflation target to ease the strain of prolonged ultra-low rates on financial institutions' profits.

At the two-day rate review that ended on Friday, the BOJ maintained a pledge to guide short-term rates at minus 0.1% and 10-year government bond yields around zero percent. It also said it would continue to buy Japanese government bonds.

Factories across the globe slammed on the brakes last month as demand was hit by the U.S.-China trade war and slowing global growth. In a nod to the increased risks, the BOJ cut its assessment on overseas economies to say they are showing signs of slowdown. It also revised down its view on exports and output.

Kuroda acknowledged the challenges the economy faced but gave no indication there would be any additional stimulus. "It is true Japan's exports and output are being affected by slowing overseas growth," Kuroda said. "On the other hand, domestic demand continues to grow. As such, we maintain our baseline view that the economy is expanding moderately."

He said while it would likely take longer to achieve the BOJ's price target, most board members thought it most appropriate to "patiently maintain" current stimulus given some improvement in the output gap.

The BOJ faces a dilemma. Years of heavy money printing for asset purchases have dried up market liquidity and hurt commercial banks' profits, stoking concern over the rising risks of prolonged easing.

And yet, subdued inflation has left the BOJ well behind other major central banks in dialling back crisis-mode policies, leaving it with little ammunition to battle the next recession.

While Kuroda insists that hitting 2% inflation remains a priority, politicians and economists are increasingly expressing doubts about the target.

Finance Minister Taro Aso said on Friday that "things could go wrong" if the BOJ insisted too much on achieving 2% inflation.

Kuroda said the target was an important tool the BOJ uses to achieve its mandate of price stability.

"Inflation is affected by oil price moves and various other factors. We also need to understand it would take some time for inflation to pick up in Japan after a long period of low growth and deflation," Kuroda said, when asked about Aso's remarks.

Many in the BOJ expect Japan's economy to emerge from the current soft patch in the second half of this year, assuming Beijing's stimulus plans can revive Chinese demand.

The biggest worry among BOJ policymakers is that weakening exports and output will hurt corporate sentiment, prompting firms to delay capital expenditure and wage hikes.

Kuroda said that while such a risk cannot be ruled out, the chance of a deep economic downturn remains small.

The USD/JPY bulls have registered a daily close back above the 200-day moving average, which is currently at 111.44, which has strengthened the underlying bullish market structure. We opened EUR/JPY long at 126.00 in anticipation for gains to our 129.00 target.

The Bank of Japan cut its inflation forecasts on Wednesday but maintained its massive stimulus programme, with Governor Haruhiko Kuroda warning of growing risks to the economy from trade protectionism and faltering global demand.

Rising pressure from the trade war between China and the United States, Japan's biggest trading partners, is adding to strains on the world's third-largest economy and undermining years of efforts by policymakers to foster durable growth.

"To be honest, if U.S.-China trade tensions are drawn out, there will be a serious risk to the global economy – first to the two countries’ own economies," Kuroda told a news conference after the end of the two-day policy review. "For now, that possibility is slim, and I hope they will resolve this soon."

As expected, the BOJ trimmed its inflation forecasts, reinforcing views that it will have to stick with its unprecedented economic support for some time to come.

But despite rising risks such as trade disputes and Brexit, the central bank also maintained its view that Japan's economy will continue to expand at a modest pace.

Kuroda struck an optimistic tone, saying the economy would likely continue expanding through fiscal 2020.

China on Monday reported its slowest growth in nearly three decades and it is expected to lose more steam in coming months. The International Monetary Fund trimmed its global growth forecasts and a survey showed increasing pessimism among business chiefs amid the trade tensions.

"Such downside risks concerning overseas economies are likely to be heightening recently, and it also is necessary to pay close attention to their impact on firms' and households' sentiment in Japan," the BOJ said in a quarterly outlook report released along with the policy decision.

The BOJ reiterated a pledge to continue buying Japanese government bonds and left its short-term interest rate target unchanged at minus 0.1%. It also said it would keep guiding 10-year government bond yields around zero percent.

In its outlook report, the BOJ's nine-member board cut its economic growth projections for the current fiscal year to March but raised its growth forecasts slightly for the fiscal years 2019 and 2020, with government spending expected to offset the pain of a planned sales tax hike this October.

The BOJ cut its forecast for core consumer inflation to 0.9% in the coming fiscal year from 1.4%, reflecting slumping oil prices. It was the fourth downward revision by the central bank to its inflation forecast for fiscal 2019 since it was first issued in April 2017.

The central bank also trimmed core consumer inflation view for fiscal 2020 to 1.4%, from 1.5% forecast in October.

As part of efforts to prevent financial institutions from sitting on a huge pile of cash, the central bank decided to extend the deadline by one year for lending schemes aimed at encouraging financial institutions to boost loans and support growth foundations .

The BOJ's radical stimulus programme has had some unintended consequences, as years of low rates hurt financial institutions' profits.

The central bank has also amassed a mountain of Japanese government bonds and exchange-traded funds in its marathon asset buying spree, risking distortions in financial markets.

The USD/JPY bulls continue to tighten their grip on this market as there have now been 4 daily closes in a row above the 109.16 Fibonacci level, a 50% retrace of the 114.21 to 104.10 (November to January) fall. That has unmasked the 30-day MA at 110.04, a break and daily close above which will strengthen the bullish outlook. We keep our short unchanged below that barrier.

Japan's annual core consumer inflation slowed to a seven-month low in December as soft household spending kept firms from raising prices, a further sign of the growing challenge faced by the central bank in achieving its elusive 2% target.

The data comes ahead of the Bank of Japan's rate review next week, where the nine-member board is seen cutting its price forecasts and warning of heightening global uncertainties.

The core consumer price index, which includes oil products but excludes volatile fresh food costs, rose 0.7% in December from a year earlier, government data showed on Friday, slowing from the previous month's 0.9% gain.

It fell short of a median market forecast for a 0.8% gain and was the slowest pace of increase in seven months.

The data underscores the fragile nature of Japan's economic recovery, as escalating Sino-U.S. trade frictions and slowing Chinese growth weigh on exports and business sentiment.

Core consumer inflation may grind to a halt in coming months as recent oil price falls push down gas and electricity bills, which could put the BOJ under pressure to ramp up an already massive stimulus programme.

Recent falls in crude oil prices were already pushing down gasoline costs, and will likely lead to declines in electricity and gas bills from around March or April, said a government official briefing reporters on the data.

BOJ officials have said they will look through the effect of temporary factors like oil price moves and focus on how the underlying strength of the economy affects prices.

But the central bank may find it difficult to justify its view a continued economic recovery will gradually push up inflation, as fears of slowing global demand could discourage firms from boosting wages and giving consumers more disposable income.

An index the BOJ focuses on - the so-called core-core CPI that strips away the effect of both volatile food and energy costs - rose just 0.3% in December, flat from the previous month's pace.

Stubbornly low inflation has forced the BOJ to maintain a radical stimulus programme despite the rising costs, such as the hit to financial institutions' profits from years of low rates.

Japan's economy shrank in the third quarter of last year and some analysts suspect that any rebound in October-December may have been weaker than initially expected, as trade protectionism and slowing global demand hurt business sentiment.

The USD/JPY has registered a daily close above the major 109.16 Fibo, a 50% retrace of the 114.21 to 104.10 (November to January) drop, which has in turn unmasked the falling 30-day MA which is currently at 110.41.

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